Long Memory Processes and Chronic Inflation: Detecting Homogeneous Components in a Linear Rational Expectation Model

January 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper is an empirical study of the links between monetary variables and inflation based on Cagan’s equation and its rational expectations solution, when the forcing variable is a fractionally integrated process. As demonstrated by Hamilton and Whiteman, the existence of bubbles and other extraneous influences can be detected only by verifying the difference in the order of integration between the monetary base and the price level series. This paper shows that a fractionally differenced model overcomes Evans’ critique of this test and that chronic inflation is essentially a monetary phenomenon caused by fiscal imbalance.

Subject: Economic theory, Fiscal policy, Hyperinflation, Inflation, Monetary base, Money, Prices, Rational expectations

Keywords: ARFIMA process, consumer price price level, Hyperinflation, Inflation, inflation expectation, model ARFIMA, Monetary base, money supply, present value, price level, Rational expectations, stochastic process, WP

Pages:
66
Volume:
1994
DOI:
https://doi.org/10.5089/9781451841695.001
Issue:
002
Series:
Working Paper No. 1994/002
Stock No:
WPIEA0021994
ISBN:
9781451841695
ISSN:
1018-5941

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Notes

The empirical analysis for six countries, Argentina, Brazil, Bolivia, Chile, Peru, and Former Socialist Federal Republic of Yugoslavia is included. Also published in Staff Papers, Vol. 41, No. 3, September 1994.

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